Markets still on shaky ground

NEW YORK (AP) - September 16, 2008

While most investors last week expected that the central bank would leave short-term interest rates unchanged, the sharp sell-off Monday that left the Dow Jones industrials and the Standard & Poor's 500 index down by more 4 percent makes the Fed's move harder to predict.

The bankruptcy filing of /*Lehman Brothers*/ Holdings Inc. and the quickly assembled weekend sale of /*Merrill Lynch*/ & Co. to Bank of America Corp. sent world markets reeling. Investors fear that tectonic shifts in the power structure of Wall Street signal that the financial sector's trouble with imperiled credit are far from over.

The Fed's regularly scheduled meeting, which many economists had expected would be a pro forma occurrence, is now much anticipated one, especially after central banks around the world have loosened money supplies, hoping an injection of capital will help soothe markets.

Many observers now call for a small interest rate cut, especially now that a sharp drop in oil prices since mid-summer has helped ease policymakers' concerns about inflation.

Beyond speculating on what moves the Fed might make, investors are also eyeing the latest woes of American International Group Inc. Worries about the well-being of the world's largest insurer pummeled the stock again Monday, sending it down about 61 percent. After the closing bell Monday, Fitch Ratings reduced its rating on the company. Lower ratings can add to the amount of cash the already cash-strapped company has to set aside.

Dow Jones industrial average futures fell 38, or 0.35 percent, to 10,921; on Monday, the Dow lost 504 points, their largest drop since the September 2001 terror attacks.

Standard & Poor's 500 index futures fell 7.70, or 0.64 percent, to 1,188.20. Nasdaq 100 index futures rose 6.25, or 0.36 percent, to 1,727.50.

Investors also will be examining a report due at 8:30 a.m. EDT on consumer prices. Wall Street expects the Labor Department will report that a sharp drop in oil helped lower its Consumer Price Index. Analysts expect the report will show a drop of 0.1 percent for August, according to a consensus of economists surveyed by Thomson/IFR.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.38 percent from 3.41 percent late Monday. The dollar was lower against other major currencies, while gold prices rose.

Overseas, markets in Asia fell sharply Tuesday after being closed Monday. Japan's Nikkei stock average fell 4.95 percent. Hong Kong's Hang Seng index lost 5.44 percent. In morning trading in Europe, Britain's FTSE 100 fell 1.42 percent, Germany's DAX index lost 1.23 percent, and France's CAC-40 slipped 0.37 percent.

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